Pre-Qualification VS. Pre-Approval and Why the Difference is Important

In the home buying process, the majority of conversations tend to revolve around mortgage interest rates and capitalizing on the low rates. This makes sense, as current interest rates are just around or over 4%. This number is very low for historic averages.

However, understanding further details may aid the process of buying a home. Primarily, many get confused between “pre-qualification” and “pre-approval.” In short, pre-qualification is less formal. It includes discussing income, debt, and other financial pieces with a lender. At the end of the conversation, the lender will be able to estimate how much a person could receive in a loan. This is not a guarantee; rather, it is an estimate based on the information given.

Pre-approval is a step beyond pre-qualification. The pre-approval process actually verifies a person’s finances and credit score and goes through an underwriting process. A person must submit paystubs, tax returns, bank account statements, and W2s, along with other applicable financial documents. Upon completion of this and the mortgage application, the potential buyer receives a letter stating the pre-approval amount.

We find it helpful for potential buyers to complete the pre-approval process for a couple of reasons. First of all, knowing the amount a person may afford allows buyers to look at homes most suited for them. Instead of looking over or under a pre-approved price range, buyers may seriously consider homes in the correct price range. We have had situations where clients are pre-qualified for a certain amount, but after the pre-approval process, they realize they are actually approved for a higher-priced home, and of course, we have had clients that were looking at homes higher than they should consider. By obtaining pre-approval, buyers may maximize the time looking at well-matched properties, and minimize the time waiting for a loan approval in this scenario.

Additionally, obtaining pre-approval places a buyer in a stronger position. For example, if a seller receives two similar offers, one of which is pre-qualified, and one is pre-approved, the likelihood is that the seller will select the pre-approved offer, as it is more secure. The closer an offer is to the approval process, the stronger it becomes.  The highest quality offer is a cash offer, without a loan approval contingency, the pre-approval is the next best thing.

In general, understanding these differences allows buyers to navigate the process of buying a property more smoothly. It also allows sellers to identify the differences between potential offers.

The importance of the interest rate is significant. The general rule of thumb is that a 1 percent interest rate increase results in 10% lower purchase power. As interest rates remain at an all-time low, the lending process is important to understand, as it plays such an impact on buying a home and allows buyers to maximize their purchase price.